US easing spurs inflation fears

Updated: 2013-02-28 02:04

By Chen Jia in Beijing and Zhang Yuwei in New York (China Daily)

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As US Federal Reserve chairman Ben Bernanke suggested further monetary easing was on the way, economists warned that this could lead to higher inflation and dilute the value of China's foreign currency assets.

The warning came as China's monetary authorities are taking steps to prevent an asset bubble as economic growth picks up speed.

Bernanke told the Senate Banking Committee on Tuesday that the Fed initiative in bond purchases is creating a stronger recovery at home and "mutually beneficial" results for other countries.

"If all the major economies that need support provide stimulus and extra aggregate demand, that's mutually beneficial. For example, China depends on the strength of Europe and the US as its export market. This is a positive-sum game, not a zero-sum game," Bernanke said.

However, Zhang Yongjun, deputy director of the Economic Research Department of the China Center for International Economic Exchanges, a leading think tank, said Bernanke's remarks were only an excuse for a policy that may bring a "disastrous aftermath" to emerging economies.

"Although the short-term boosting of US demand for exports may benefit production growth in China, rising liquidity will pose a challenge," Zhang said.

China's currency rose for a fourth day on Wednesday influenced by Bernanke's defense for continually increasing the dollar supply.

The People's Bank of China raised the yuan's reference rate for a second day, strengthening it by 0.02 percent to 6.2842 to the dollar.

Zong Liang, deputy head of the international finance research institute of the Bank of China, said that the appreciation pressure on the yuan in the coming months may be mainly from the outside.

The Fed currently purchases $85 billion in bonds every month, and there will be no clear termination signal unless it sees a substantial improvement of the employment situation, Chinese economists said.

Since the financial crisis broke out in 2008, the Fed has launched three rounds of quantitative easing in which it increased the money supply by buying Treasury bonds and certain mortgage-backed securities. This has involved more than $2.5 trillion so far, and slashed the interest rates to effectively zero. In September 2012, the Fed launched the third round, dubbed QE3.

Lawrence Goodman, president of the Center for Financial Stability, a New York think tank, called QE3 "a bet being waged over time".

Such a monetary policy aimed at domestic objectives benefits China in the short term, by helping to keep the global economy afloat. But "distortions in financial markets related to this untraditional monetary policy can prove to be a substantial cost in the future," he said.

"Countries with relatively high interest rates will be more heavily influenced by the move to QE by many central banks around the world in addition to the Fed," he added.

Japan's Prime Minister Shinzo Abe has also taken drastic monetary easing measures to fulfill his election promise of ending deflation and reviving growth.

Dubbed "Abenomics'', the policy has pulled down the Japanese currency by 16 percent versus the US dollar and 21 percent against the euro since November. Meanwhile, the Japanese stock market has been risen by 27 percent.

"For China, the influence of Japan's monetary easing is predicted to be less than that from the US," Zhang from the CCIEE said.

The widespread monetary easing is likely to drive large capital inflows to China, pushing up commodity prices and increasing inflation, said Liu Ligang, chief China economist at ANZ Banking Group Ltd.

"Signals such as absorbing the 910 billion yuan ($144 billion) of currency liquidity last week, have shown that China's central bank is inclined to tighten the monetary policy," Liu said. "It also looks impossible for China to raise interest rates in the first half this year."

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